Author Topic: HSA oopsie  (Read 1360 times)

ysette9

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HSA oopsie
« on: November 05, 2019, 09:53:06 PM »
I had the first opportunity to do an HSA last year when I switched companies to one that provides health coverage with a high deductible plan for free for employees only.
I went for it because it cost me nothing just to get access to an HSA, as these forums have talked them up so much. As I have zero interest in a high deductible health plan and donít want to lose Kaiser, I continued to be covered for my actual health care needs through my husbandís work.

Fast forward a year later when I see some fine print on HSA eligibility. Not only do you have to be covered by a high deductible health plan but it has to be your ONLY health coverage. Oops. I had no idea of that second criterium when I signed up and contributed. So now I have funds in an HSA account that technically should not be there. What should I do? Iím inclined to be lazy and ignore it, especially as I only have less than 2 yearís worth of contributions invested. Is this going to come back and bite me in the ass in the future?

seattlecyclone

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Re: HSA oopsie
« Reply #1 on: November 06, 2019, 01:07:35 AM »
You have made excess contributions to your HSA. These contributions should not have been deducted from your income in the year they were made. If you fail to withdraw the excess contributions before the due date of the tax return for the year in which you made the contribution (too late for your 2018 contributions, but there's still time for your 2019 contributions), you owe a 6% excise tax on the excess contribution. Furthermore that 6% is owed again each year until you remove the excess contributions and any earnings associated with them.

Option 1: Fix it now. You'll need to withdraw all the funds from your HSA. You'll also need to amend your tax return for last year to add the HSA contribution (and any earnings) back into your income, pay the 6% excise tax, and also pay any penalties or interest that go along with the fact that you didn't pay that tax last year when you should have. For this year you'll need to make sure that you include any 2019 HSA contributions in income even if your employer excluded those contributions on your W-2.
Option 2: Be lazy and ignore it. Maybe you get lucky and the IRS doesn't notice for a few years, long enough for the statute of limitations to expire for the years you made excess contributions. If so, congratulations! You got away with it and your HSA is probably good to go from now on. If you don't get lucky, the IRS finds out in a year or two and you owe more than you would have owed if you fixed it now.

Neither option looks like much fun to me. Sorry! Best of luck sorting this out.

MDM

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Re: HSA oopsie
« Reply #2 on: November 06, 2019, 02:06:35 AM »
...long enough for the statute of limitations to expire....
It's even worse: If a Form 5329 is not filed, there is no SOL date, and presumably Form 5329, Additional Taxes on Qualified Plans hasn't been filed because it's only now that the situation has arisen.

ysette9, sorry to say (and don't shoot the messengers) that the regulations are pretty clear on this one.  Perhaps the HSA provider should have asked "are you sure you qualify?" in more explicit terms, but at least you have caught it now, rather than 10 or 20 years down the road with all those accumulated penalties.

terran

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Re: HSA oopsie
« Reply #3 on: November 06, 2019, 06:33:24 AM »
Yep, that's a big one. Even being covered by a spouse's healthcare FSA without being covered by their insurance can disqualify you from HSA eligibility.

seattlecyclone

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Re: HSA oopsie
« Reply #4 on: November 06, 2019, 09:40:58 AM »
...long enough for the statute of limitations to expire....
It's even worse: If a Form 5329 is not filed, there is no SOL date, and presumably Form 5329, Additional Taxes on Qualified Plans hasn't been filed because it's only now that the situation has arisen.

Fascinating. Suppose you're past the statute of limitations for your 1040. They can't come after you for deducting the excess contribution in the first place, but they can still look back and see that you made one for the purpose of assessing the extra 6% tax each year?

ysette9

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Re: HSA oopsie
« Reply #5 on: November 06, 2019, 09:51:11 AM »
You have made excess contributions to your HSA. These contributions should not have been deducted from your income in the year they were made. If you fail to withdraw the excess contributions before the due date of the tax return for the year in which you made the contribution (too late for your 2018 contributions, but there's still time for your 2019 contributions), you owe a 6% excise tax on the excess contribution. Furthermore that 6% is owed again each year until you remove the excess contributions and any earnings associated with them.

Option 1: Fix it now. You'll need to withdraw all the funds from your HSA. You'll also need to amend your tax return for last year to add the HSA contribution (and any earnings) back into your income, pay the 6% excise tax, and also pay any penalties or interest that go along with the fact that you didn't pay that tax last year when you should have. For this year you'll need to make sure that you include any 2019 HSA contributions in income even if your employer excluded those contributions on your W-2.
Option 2: Be lazy and ignore it. Maybe you get lucky and the IRS doesn't notice for a few years, long enough for the statute of limitations to expire for the years you made excess contributions. If so, congratulations! You got away with it and your HSA is probably good to go from now on. If you don't get lucky, the IRS finds out in a year or two and you owe more than you would have owed if you fixed it now.

Neither option looks like much fun to me. Sorry! Best of luck sorting this out.
Thank you for your input as I know you are especially knowledgeable. Iíll have to go back and check my return. California doesnít treat HSAs as tax-advantages so I may not have gotten credit for the contribution towards lowering my income. Iíll double check.

What a pain in the ass.

seattlecyclone

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Re: HSA oopsie
« Reply #6 on: November 06, 2019, 09:56:31 AM »
Even though California doesn't recognize HSAs, they are still deductible federally in all 50 states. My post was only meant to touch on the federal tax implications as I know very little about state taxes.

ysette9

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Re: HSA oopsie
« Reply #7 on: November 06, 2019, 10:08:15 AM »
Even though California doesn't recognize HSAs, they are still deductible federally in all 50 states. My post was only meant to touch on the federal tax implications as I know very little about state taxes.
Fair enough.

MDM

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Re: HSA oopsie
« Reply #8 on: November 06, 2019, 10:21:17 AM »
...long enough for the statute of limitations to expire....
It's even worse: If a Form 5329 is not filed, there is no SOL date, and presumably Form 5329, Additional Taxes on Qualified Plans hasn't been filed because it's only now that the situation has arisen.
Fascinating. Suppose you're past the statute of limitations for your 1040. They can't come after you for deducting the excess contribution in the first place, but they can still look back and see that you made one for the purpose of assessing the extra 6% tax each year?
Apparently so.

E.g., see Bogleheads.org - Search for "statute of limitations" posts by Alan S..  Most of those are about excess IRA contributions, but form 5329 applies to both IRAs and HSAs (and a few others).

Dicey

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Re: HSA oopsie
« Reply #9 on: November 06, 2019, 10:52:07 AM »
I know you were already searching for a reason to stop doing your own taxes. Nail: meet coffin.

Sorry this happened, but I agree with SC. Fix it and forget it. It's just a speed bump in your financial life. Don't let it turn into Jaws (cue scary music). Hmmm, better still, get a talented CPA and have them do it.